The new rules on termination of payments taxation

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The new rules on termination of payments taxation

April saw the introduction of a change in tax law with regard to termination payments. Part of Her Majesty’s Revenue & Customs (HRMC) aim to simplify tax and remove the ways in which the system can be manipulated, this is now in force as of the 6th of April. It affects both employees and employers and is applicable when a contract is terminated without the proper notice being given. We take a look at how you may be affected as an employer by the introduction of these changes to the tax regime.

What has changed?

Previously, when an employee left an organisation, any termination pay was not subject to national insurance contributions (NICs) on the part of the employer, or income tax on the part of the employee. With the new rules, these will now apply, regardless of whether or not the termination payment is included within the contract. This will replace any termination payments that may have been made in lieu of notice (known as PILON).

What does it apply to?

The rules apply to any payment made to an employee as part of a termination agreement. This includes basic salary for the months that would have been part of the notice period, as well as any benefits that would apply during this time. HMRC’s logic with this is that it evens out any differences between how employment contracts are drafted, evening out the field for all.

Who is affected?

Both employers and employees are affected by these changes. Employees will have to pay income tax on the basic pay that they would have received, had they worked their notice period; this applies even if they are not paid any PILON that may have been written into their contract. If the payment is structured in some other way, such as damages for example, the new rules will still apply.

From an employer’s perspective, they will have to pay national insurance contributions on the amount of pay that applies to the notice period.

Related changes

Before April 2018, where an employee worked overseas during the termination period, the amount of tax charged was reduced for those periods of time. This is known as foreign service relief. However, that will no longer apply and is backdated to periods worked overseas going back to September 2017. The only exemption is for seafarers where foreign relief service will continue to apply.

Delay in applicable changes

One element of this legislation that has been put back relates to Class 1A national insurance contribution charges for an employer in relation to termination payments of more than £30,000, and on sporting testimonials that are greater than the £100,000 lifetime exemption. These will now be brought into force in April 2019 instead.

If you have any questions or concerns regarding the new changes or would like professional advice on applying them our team at Bells Inc. Hamilton Stewart would be more than happy to help. Find us 020 8763 1711 and for an initial discussion or to make an appointment.